Former Federal Reserve Chairman Alan Greenspan yesterday said the United States has no control over oil prices, which are now in the hands of big state-owned oil companies, and it will not have energy independence any time soon unless it produces technological breakthroughs on ethanol or alternative fuels.
Today’s high gasoline prices rankle consumers and stir up political passions, but are not having a big impact on the economy because of the flexibility brought about by open international markets that have been financing U.S. purchases of foreign oil and gas, he testified before the Senate Foreign Relations Committee in his first congressional appearance since retiring from the Fed Jan. 31.
To defend against energy shocks caused by hostile foreign producers and other disruptions in today’s tight markets, Congress should be sure to ward off protectionism and keep nurturing open markets. Lawmakers also need to fund research into the feasibility of mass-producing alternative fuels like liquefied natural gas and ethanol produced from grass and other agricultural fibers, he said.
“The balance of world oil supply and demand has become so precarious that even small acts of sabotage or local insurrection can have an effect on oil prices,” he said, appearing relaxed and assertive as he resumed his previous incarnation as a private economic adviser.
American businesses have been more successful at adjusting to and containing higher energy costs than U.S. consumers, who are “struggling” to maintain their driving habits, he said, offering views that, though still prized on Capitol Hill, no longer have the punch they once packed in financial markets when he presided as the world’s most powerful central banker.
U.S. leaders in the past tried to assert control over fuel prices by increasing production from the nation’s oil reserves. Those reserves were so vast during the first half of the 20th century that they gave the U.S. virtual control over world oil prices, he said.
But that is no longer possible, because the huge oil fields of east Texas, the Gulf of Mexico and Alaska are rapidly depleting even as the nation’s appetite for oil is growing.
“We’re out of the picture with respect to price. … We are not going to have oil independence again,” he said. “The energy abundance on which this nation was built is over. We will not have the uninhibited lifestyle” that Americans had to freely consume energy until the 1970s, when the Organization of Petroleum Exporting Countries emerged and gained control over world oil prices, he said.
“Oil is a finite resource,” he said. “At some point, we will reach peak production and it will go down” and alternatives will have to be found, because Americans “will not stop driving,” as they have shown despite a doubling of fuel prices since 2002.
Today, states like Venezuela, Iran, Iraq and Russia, which have sometimes been unfriendly or outright hostile to consuming countries, control 80 percent of the world’s oil reserves. Some have closed their borders to Western oil companies that have the expertise needed to develop their reserves. In any case, most of these states are inclined to only slowly release their oil so as to keep prices high and maximize the revenue stream with which they feed their populations and economies.
Of all the national oil companies, only Saudi Arabia’s Aramco has responded to calls for greater output from consuming nations, Mr. Greenspan said. Even nations that are otherwise friendly to the U.S., like Mexico, have not increased output enough to keep up with rapidly growing demand in China and the U.S.
Mexico’s constitution prohibits foreign ownership or development of oil reserves. The state oil company, Pemex, needs U.S. expertise to tap into large reservoirs of oil in deep-water areas of the Gulf of Mexico, Mr. Greenspan said, but has been unable to receive authorization from the legislature to hire outside companies.
The U.S. has been gradually weaning itself away from its “worrisome” dependence on petroleum through greater fuel efficiency since the 1970s. But it remains the world’s largest consumer of oil and can only bring down prices by paring demand rather than increasing production, he said.
Today’s high prices are accelerating the trend toward greater fuel efficiency, as well as an intensive search for alternative fuels, he said.
He urged Congress to promote the use of alternatives already available, including hybrid gas and electric cars, nuclear power and ethanol, although he discouraged any grand government-financed “Apollo” project, saying the markets would do a better job of ferreting out the next generation of fuels.
While the U.S. has been gearing up to produce ethanol from corn and incorporate it into gasoline, that will not be a long-term solution, he said, because it cannot be produced in great enough quantities. Using all the corn the U.S. produces to make ethanol would satisfy only about 10 percent of U.S. demand, he estimated. Ethanol produced from cellulosic fibers like grass — a much broader source of fuel — shows promise, he said.
While speculation in oil futures contracts by hedge funds and other investors has driven up the price of oil, it has helped the U.S. to adjust by accelerating the efficiency trend, he said.